1. Chapter 1. Appendix Using models scarcity & opportunity costs decision-making in markets Using models scarcity & opportunity costs decision-making in markets

2. With scarcity, must choose Economic system decides what to produce? how to produce? for whom to produce? Economic system decides what to produce? how to produce? for whom to produce?

3. who decides? households, firms and government decisions coordinated by markets buyers and sellers meet market set price that rations scarce resources households, firms and government decisions coordinated by markets buyers and sellers meet market set price that rations scarce resources

4. Using models simplification of reality better understand how something works to use: make assumptions apply them to a framework look at implications simplification of reality better understand how something works to use: make assumptions apply them to a framework look at implications

5. if model is too simple implications are not helpful if model is too complicated no implications models are only as good as their assumptions if model is too simple implications are not helpful if model is too complicated no implications models are only as good as their assumptions

6. A model of markets market for haircuts model behavior of buyers Demand model the behavior of sellers Supply buyers & sellers determine quantity & price market for haircuts model behavior of buyers Demand model the behavior of sellers Supply buyers & sellers determine quantity & price

7. MarketMarket haircuts in CNY per week what factors affect buyer decisions? price of haircuts income population fashion price of substitutes haircuts in CNY per week what factors affect buyer decisions? price of haircuts income population fashion price of substitutes

8. what factors affect sellers decisions? price of haircuts costs of haircuts profitability of alternative business what factors affect sellers decisions? price of haircuts costs of haircuts profitability of alternative business

9. Assume:Assume: first look at relationship between quantity and price hold other factors constant men and women do not differ in buying decision men and women not viewed differently by sellers first look at relationship between quantity and price hold other factors constant men and women do not differ in buying decision men and women not viewed differently by sellers

10. DemandDemand relationship between quantity of haircuts demanded price of haircuts as price rises, Qd falls holding other factors constant Law of Demand relationship between quantity of haircuts demanded price of haircuts as price rises, Qd falls holding other factors constant Law of Demand

11. Demand schedule PQd $3015,000 $2020,000 $1025,000 PQd $3015,000 $2020,000 $1025,000

12. SupplySupply relationship between quantity of haircuts supplied price of haircuts as price rises, Qs rises holding other factors constant Law of Supply relationship between quantity of haircuts supplied price of haircuts as price rises, Qs rises holding other factors constant Law of Supply

13. Supply schedule PQs $3025,000 $2020,000 $1015,000 PQs $3025,000 $2020,000 $1015,000

14. the market supply and demand together graph each schedule supply and demand together graph each schedule

15. P Q haircuts $30 15K $20 20K $10 25K D S P = $20 Q = 20K

16. equilibriumequilibrium P=$20, Q=20,000 Qs = Qd with other factors constant, P & Q will stay at this point P=$20, Q=20,000 Qs = Qd with other factors constant, P & Q will stay at this point

17. Allow factors to change CNY population increases more people, more haircuts demanded at every price increase in demand CNY population increases more people, more haircuts demanded at every price increase in demand

18. P Q haircuts $20 20K D S D’ D increases: P increases Q increases

19. Allow factors to change NY increases fee for cosmetology license more costly to provide haircuts fewer haircuts supplied decrease in supply NY increases fee for cosmetology license more costly to provide haircuts fewer haircuts supplied decrease in supply

20. P Q haircuts $20 20K D S S’ S decreases: P increases Q decreases

21. Men vs. women & haircuts assume sellers view women’s haircuts as more costly at any price, sellers willing to provide fewer haircuts for women than for men Women’s supply curve to the left of men’s supply curve assume sellers view women’s haircuts as more costly at any price, sellers willing to provide fewer haircuts for women than for men Women’s supply curve to the left of men’s supply curve

22. P Q haircuts D S men S womenWomen’s haircuts have a higher price

23. assume women are less price sensitive to haircuts than men price increase causes small decrease in Qd women’s demand for haircuts is less elastic than men’s women’s demand curve is steeper than men’s assume women are less price sensitive to haircuts than men price increase causes small decrease in Qd women’s demand for haircuts is less elastic than men’s women’s demand curve is steeper than men’s

24. P Q haircuts D men S Women’s haircuts have a higher price D women

25. is this discrimination? some laws forbid different prices for men vs. women haircuts drycleaning is this fair? is this efficient? some laws forbid different prices for men vs. women haircuts drycleaning is this fair? is this efficient?

26. A model of opportunity cost NY receives $40 million from Feds use on combo of 2 projects prison cells $10,000 each SUNY student unions $4 million each NY receives $40 million from Feds use on combo of 2 projects prison cells $10,000 each SUNY student unions $4 million each

27. graph all possible combos: prisons student unions 10 4000 any point on the line is efficient, using all $40 million any point inside the line is inefficient, any point above the line is not possible, using less than $40 million using more than $40 million

28. opportunity cost choice between prison cells and student unions if want 10 student unions, must give up all prisons cells every 1 student union costs us 400 prison cells choice between prison cells and student unions if want 10 student unions, must give up all prisons cells every 1 student union costs us 400 prison cells

29. opp. cost of 1 student union = lost benefits from not having 400 more prisons cells opp. cost of 1 student union = lost benefits from not having 400 more prisons cells

30. NY state budget many choices for spending AND raising revenue whatever the choice, something is given up -- some program not funded or -- private spending lost to taxes many choices for spending AND raising revenue whatever the choice, something is given up -- some program not funded or -- private spending lost to taxes